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Let’s begin by talking about prospects and clients under age 65. Then we will review the over age 65 information I provided in the last two newsletters.
The standard deduction for a single person under age 65 is now $12,000. A married couple filing jointly now receives a $24,000 standard deduction. That means the first $24,000 of taxable income is not taxable because the standard deduction offsets that amount of taxable income.
For married couples the next $19,050 is taxed at 10 percent. So, if a married couple had $43,050 of taxable income their effective tax rate would be 4.4 percent. That is $1,905 divided by the $43,050 of total income.
Continuing, the next $58,350 of taxable income is now taxed at 12 percent which is $7,002. Last year the rate would have been 15 percent. So, if a married couple has taxable income of $101,400 their effective tax rate under the new law is 8.8 percent. That is $8,907 divided by $101,400.
Let’s stop here before we move on to the 22 and 24 percent tax rate. Many of you ask if clients should start moving money from 401Ks and IRAs before retirement. Many ask me what should be explained about making contributions to 401Ka, IRAs, 403Bs and 457 plans while you are working.
Here are a few examples for you to consider. Let’s say you have a couple with a $70,000 per year taxable income. You could advise them to withdraw $30,000 from their taxable accounts every year. They would remain in the 12 percent tax bracket with an 8.8 percent effective income tax rate. Ask them this question: Would you like to pay a guaranteed effective tax rate on that money of 8.8 percent now or do you want you or your family to pay a much higher rate on that money later when you retire or die?
You then simply reposition the money every year into vehicles that have lower or no future income tax liability depending on health and the client’s inclination.
When they ask if they should contribute to anything but a life insurance cash value policy, a Roth IRA or a Roth 401K, ask them if it is better to get an effective tax deduction of 8.8 percent or less or would it be smarter to pay the taxes now and never pay the income taxes ever again on that money? When they reason it out for themselves, the answer comes easily. That is why it is so important to have a foundational understanding of income taxes. The benefits become even more impressive in the new 22 and 24 percent income tax brackets.
The next $87,600 for a married couple is taxed at 22 percent, which is $19,272. So, if a married couple has a taxable income of $189,000 their effective tax rate is 14.9 percent. That is $28,179 divided by $189,000.
The next $150,000 of taxable income for a married couple is taxed at 24 percent, which is $36,000. So, if a married couple has a taxable income of $339,000 their effective tax rate is 18.9 percent. That is $64,179 divided by $339,000.
The questions remain the same for high income earners. Do you think taxes will be higher or lower in the future? Do you believe they could be way higher? Do you want to pay them? If you could pay only 18.9 percent guaranteed effective tax rate now and permanently eliminate the income tax liability on that money forever, would you? Again, they will usually reason it out for themselves.
Instead of contributing and getting a tax deduction now when taxes are historically low, wouldn’t it be smarter to pay the taxes now and turn forever taxed money into never taxed money?
Don’t you see what an amazing opportunity this is to help the American people?
For single taxpayers under ager 65 the effective tax rates remain the same on approximately half the income. Our clients are NOT AWARE what a spectacular opportunity this is unless you ask them.
Now, let’s return to last month’s over age 65 married couples and singles. I will add some explanation for each step.
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In next blogpost, we will show you the many examples Van Mueller uses to illustrate the tax saving strategies.